Reuters reports that Valero Energy (NYSE: VLO), the biggest publicly-owned oil refiner in the U.S., suffered a 67% decline in net income. Its bad news was that the price of its input -- crude oil -- doubled to an average $125 a barrel in the second quarter, while its product, gasoline, increased a mere 25% in price.

There is good news here for investors. Analysts expected it to earn $1.35 per share, but Valero beat estimates by two cents. Not only that but its revenues rose 51%. Reuters quotes Valero's CEO who expects gasoline margins to be weak and industry-wide refinery utilization rates to drop through the end of 2009. In simple terms, refineries have the ability to produce more gasoline than people in the U.S. want to consume.

The stronger part of Valero's business is what it calls distillates -- diesel fuel, jet fuel and heating oil -- which seem to have much more stable demand in the face of rising prices. That stronger demand translates into higher utilization rates and higher profit margins through 2009. If that demand starts to fall off, however, Valero could be in even more trouble.

Its stock is down 55% for the year but is up 3% in premarket -- I am guessing based on the better than expected earnings results.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Valero securities.

Park Falls Wisconsin is just like any of the hundreds of other bustling small towns across America. At least, it was until Monday July 14, 2008. That was the day when it was announced that the Department of Energy had awarded a $30 million grant for the construction and operation of a bio-refinery at the existing Flambeau River Papers, pulp and paper mill. The project shall be a show piece, and the first of it's kind.

The Park Falls Herald reported that, when in full operation, the bio-refinery is expected to produce a minimum of six million gallons of sulfur-free diesel fuel annually from nonfood-based, timber and agricultural waste materials. Additionally, the bio-refinery is expected to generate at least one trillion BTUs of process heat annually, which will be sold directly to the paper mill. That exchange is expected to make Flambeau River Papers the first integrated pulp and paper mill in North America essentially free of fossil fuel usage.

The project is expected to reach operational status by 2010, and is also expected to garner the close attention of alternative energy investors and governments world wide. The project is, in part, a response to the current presidential administration's nationwide call for increased energy independence without additional pressure being placed upon the food supply. It is widely hoped that these types of refinery operations shall soon be considered for development in other suitable locations across the country.

Crude oil surged $2.53 to $98.03 per barrel in early trading Tuesday on a Texas refinery fire and concern OPEC will cut production at its March meeting.

A strong explosion Monday created a fire and shut off production at an oil refinery operated by Alon USA Energy (NYSE: ALJ) near Big Spring, Texas. The facility can refine 70,000 barrels of crude per day.

Heating oil jumped about 6 cents to $2.71 per gallon, unleaded gasoline surged about 7 cents to $2.56 per gallon, and natural gas rose 26 cents to $8.92 per million BTUs.

Independent energy trader Jim Dietz told BloggingStocks Tuesday that given the U.S.'s barely-adequate refining capacity, any incident in the refinery system can cause a price spike.

"There is so little spare capacity in the system, even a fire at a minor location can have traders flashing the buy card," Dietz said. "The U.S. has decided to allow new refinery construction, but the next new facility won't be ready for about 5 to 6 years. Expansions at existing refineries will provide some additional spare capacity later this year." Dietz added that he has no open daily positions, and is short oil with monthly contracts.

Lyondell Chemical (NYSE: LYO) was mentioned twice as a stock to buy in this past weekend's Barron's Roundtable (subscription required), recommended by both Archie MacAllaster and John Neff. At $25, the stock is selling for 6.25x earnings, versus the S&P 500 which is selling for 15x to 16x earnings.

What is particularly attractive about Lyondell is that it bought out its Venezuelan partner's 41% stake in the Citgo refinery and now fully owns this sizable refinery. This asset should generate a lot of cash flow for Lyondell's shareholders for years to come.

Lyondell put a good chunk of debt on its balance sheet to purchase the Citgo refinery stake, but has already reduced debt by $2 to $3 billion, according to MacAllaster, who put a $40 price target on the stock.